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Why a Lease Option can be Plan A.

An investor today told me that that options are really only a good plan B. That really got me thinking about this topic and so let me state here why I disagree.

The first thing to say is that who is the Plan B for – the vendor or for the buyer?

The Vendor: I agree that most people would like to see the money now rather than in 5-7 years time. If there is lots of equity in his property e.g. property is worth £200k and you offer £140k. However
any other vendor that has a mortgage over £140k may not be able to afford to accept your “cash” offer”. This is especially true where the vendor would have to dig into their own pocket to sell his property. For instance, if the purchase price is £140k and the mortgage is 150k the vendor would have to stump up. In this latter scenario (which i would say is at least 70% of the properties out there) do you think the vendor would prefer doing a straight sale and come up with £10k or do an option for £150k with no loss or even an option for £180k and thus actually making £40k in 5-7 years time? I dare say in this scenario vendor would prefer doing an option and thus options are actually plan A.

Going back to the former scenario where there is plenty equity. It is not necessarily 100% of the time that the vendor needs the cash in the property right away. The vendor doesn’t necessarily prefer an offer for £140k losing £60k worth of equity rather than doing an option. If you were to offer them an option for £180k or even £200k. In the meantime you’ll aim to make money from the positive cashflow as you are funding your “investment” not with a “new” expensive mortgage but with an old mortgage the interest rate of which is much lower than any present mortgage).

I know some people vendors in the above scenario might want some cash upfront. Again this may not be a problem if you know how to use options.

Now that i have shown you that IMHO (and experience both as a solicitor and as investor) options are definitely more plan A to certain vendors. So, is it that options are only a plan B from the investor’s point of view ?

The Investor: You can buy the above property worth £200k either outright for £140k or do an option for £170k. Which one will you do?

If you buy a Property for £140k now you may only get at best a mortgage offer for £112k (80%) so you will need to come up with £28k to buy the property. Even if you have that money and are happy to do that how many properties will you be able to do? If you have £100k saved in your bank account you will even struggle to do 4 properties.

I don’t buy properties (as an investor) to build a “collection”! it is not monopoly! I am only interested in making money (family with 5 kids AND 1 wife!) and doing it in the most ethical way. Nothing in my business gives me more pleasure than doing an option and saving the vendor for certain bankruptcy and repossession… anyone can buy a property from an auction that has already been repossessed, it is actually my second favourite strategy, but it doesn’t give me as much pleasure AND does involve me putting some money – the deposit – down and wait 6 months to recover the money put down.

So why would I want to BUY a property when I can make MORE MONEY if I simply CONTROL the property (and have less costs involved and the opportunity to save a vendor with little or no equity from bankruptcy)?

Please feel free to let me know whether you disagree and why.

In both of these scenarios the lease option gives you a route to profiting from the property. There are no rights or wrongs, but each is an effective mechanism based upon the vendor’s circumstances, your circumstances and the property itself. The truth is that lease options may sometimes be a Plan B, but can just as effectively be a Plan A – and in many instances a lease option can be more effective as a Plan A.

The above is not intended , and should not be taken as any form of advice, whether legal or otherwise. Always take specific professional advice before taking any action.

6 Responses to “Why a Lease Option can be Plan A.”

A good article, although I’m wondering why you don’t have £100k in the bank

I think the key thing you have flagged – without wanting to sound like an unlovable banker – is leverage. For the cost of a few goods solicitors (and yes, I would recommend a certain practice in Manchester), you can create excellent future equity even if the cash flow is marginal. Cash flow sweetens the deal but any property transaction not involving a bank can only be a good thing.

Is it possible to get all needed paperwork pre-signed for the sale of the property at the start of the lease option agreement with the seller so he/she does not need to get involved again in the future?.